7 Norfund’s use of tax havens

This chapter describes and discusses Norfund’s investments in funds and its choice of location for these investments. As a supplement to this discussion, the Commission has incorporated a detailed description of rules and practice in Mauritius as part of its description below of Norfund’s use of tax havens. Mauritius is a tax haven with considerable activity, and is one of the jurisdictions of this kind that Norfund uses most frequently for its investment funds. Part of the presentation of Mauritius includes rules and elements of the country’s practices that are not relevant for Norfund, but which nevertheless need to be presented in order to provide a complete picture of the way tax havens operate and are perceived as locations.

7.1 Norfund’s investment in funds

Norfund is a state-owned institution with the following mandate:

“The object of the Norwegian Investment Fund for Developing Countries (Norfund) is to contribute equity and other risk capital, and to make loans and provide guarantees, for the development of sustainable business activity in developing countries. The aim is to create viable, profitable enterprises which would not otherwise be established because of high risk.”

It invests both directly in companies in developing countries and via funds. At 31 December 2008, Norfund had invested or committed itself to invest just over NOK 1.7 billion in fund holdings. These interests totalled almost half its total investments and commitments. In addition, Norfund has provided equity and loans to both funds and other financial institutions. The last of these financing forms also involves the use of intermediaries. The target group for this financing is non-financial companies. At 31 December 2008, Norfund’s investments and undisbursed commitments totalled about NOK 4.8 billion.

Norfund has advanced a number of arguments for investing via funds rather than directly.

• The funds are managed geographically near the companies being invested in. This ensures that the investors have access to local knowledge when making investment decisions.

• Local management strengthens owner follow-up of the underlying companies in the fund compared with direct investment by Norfund from Norway. Through owner follow-up, one can contribute to better management of the business and of other areas where companies in developing countries are often weak, including HSE, standardisation/certification and so forth.

• Following up each company involves fixed costs. Were all Norfund’s investments to be managed directly from Norway, it would have to concentrate on large companies to secure the profitability of its operations.

• The existence of funds can lower the threshold for investment by other investors in the relevant areas, and thereby increase the supply of capital to these areas.

• The existence of funds contributes to the development of local management clusters, and thereby to the build-up of expertise where the funds are managed.

In order to limit the cost of following up direct investments, Norfund’s strategy is that such placements will only be made in selected countries and in areas where the institution has a regional office. Investing through funds can thereby also be regarded as a means of expanding Norfund’s geographic range. The institution currently has three offices outside Norway, in Costa Rica, South Africa and Kenya.

Norfund has invested in 35 different funds. It has a 50 percent equity holding in three of these, while its maximum interest in the remainder is one-third. A large number of players are co-owners of the various funds in which Norfund has holdings. Almost all of these funds have at least one other development finance institution (DFI) 1 among their owners. The exceptions are two microfunds which have only Norwegian ownership. Private commercial players participate in almost half the funds. Moreover, some of the funds include participation by private players with non-commercial objectives (Oxfam, the Shell Foundation, ethical funds and so forth).

Twenty-nine of the 35 funds are located in tax havens (Delaware in the USA is regarded as tax haven in this context). Mauritius is clearly the most popular jurisdiction, with 15 of the funds located there. Table 7.2 below lists 35 of the funds in which Norfund is involved and shows where they are registered.

Each fund is an independent legal entity. This entity can also incorporate a management organisation. In many cases, however, all management services are purchased from third parties. In both cases, management can be exercised in a different location from the one in which the fund is registered. This is the most common arrangement. The picture is complicated by the fact that management-related work can be spread over a number of offices. Typically, the fund (if it has its own management capacity) or the management company will have employees in countries in which the funds invest relatively heavily. Both the direct employment and the expertise built-up in fund management will thereby often occur in countries other than the ones in which the funds are registered.

7.2 Norfund’s justification for using tax havens

Norfund has explained, in part in a written submission to the Commission (see Norfund, 2009) why the funds in which it invests are often located in tax havens. The submission argues that it is not secrecy which makes tax havens attractive locations for the funds, but the fact that these jurisdictions often offer the following:

• secure and cost-effective handling of transactions between the home countries of the investors and the companies in which the funds invest

• a good and stable legal framework specially tailored to the requirements of the financial sector

• arrangements which avoid unnecessary taxation in third countries

• political stability.

According to Norfund, the tax havens in which the funds are located often have well-developed systems for cross-border payments. Norfund notes, for example, that the funds in Mauritius in which it participates benefit from the fact that the banks they use have branch networks on the African mainland.

Norfund says that tax havens often have regulations which are well suited to investment funds. As an example, Norfund has pointed to certain funds in which it participates that would not be permitted under Norwegian rules for financial institutions and funds.

Investors do not wish to take risks unless they receive compensation in the form of higher returns. Norfund points out that the tax havens often have stronger legal traditions than other countries in the same region and that the level of corruption is often lower. Locating in a tax haven thereby reduces political risk and the danger of governments abusing their power.

With regard to the third justification, on taxation, Norfund notes that tax havens levy low or no taxes on the fund company’s profit and that they also have a relatively well-developed network of tax treaties. Such agreements ensure that double taxation is avoided. According to Norfund, location in a tax haven will not reduce tax revenues in the countries in which the funds invest. The institution has moreover declared to the Commission that it is certain the funds are not being used for money laundering.

Norfund maintains that it cannot determine on its own where the funds are to be located. These always have several owners, and Norfund normally has a minority holding. In its experience, its sister organisations in other countries and corresponding funds affiliated with international organisations prefer tax havens. Norfund has also pointed out that the mandate for the African Development Bank prohibits it from investing in funds located outside Africa.

7.3 Norfund’s portfolio and payment of tax

Norfund’s core business is to finance commercial activity in developing countries. Table 7.1 provides an overview of the portfolio for the core business. In addition, Norfund has liquid assets as well as a portfolio of loans taken over from Norad in order to be wound up.

Generally speaking, companies pay income tax when they operate at a profit. National differences in the definition of the tax base mean that a company can have a taxable profit even if the financial statements show a loss. Companies established relatively recently will often be able to offset profits against losses carried forward from earlier years, so that they do not become immediately liable to tax. Norfund often finances relatively newly established companies or ones in a growth phase. Such companies frequently have no taxable profits.

The data submitted by Norfund to the Commission include figures on operating profit and tax paid for 14 of 19 direct investments and for 33 of the 35 funds in which the institution participates. By and large, accounts are lacking only for companies which have just been established.

Of the 14 companies with complete data, eight had an operating profit in 2008. Six of these paid tax.

Eight of the 33 funds providing complete data made an operating profit in the same year. Two paid tax – one in Luxembourg and the other in Mauritius. The latter paid withholding tax to Kenya rather than tax to Mauritius. Adding together the tax paid by companies financed directly by Norfund, funds in which Norfund participates, and companies financed by these funds, and then weighting these payments by Norfund’s equity interest in the companies, yields a tax payment of NOK 66 million. This figure is an estimate made by Norfund. The institution does not have data from all the companies on tax paid, and the estimate would be higher were complete information available. The press release on Norfund’s website concerning the annual results for 2008 states: “Another important factor with regards to the development impact is the generation of tax income to national governments, a crucial factor in order to develop public services. Along with partners, companies in which Norfund had invested contributed NOK 3.2 billion in tax income in our markets.”

Of the 35 funds, only six are located in places not regarded as tax havens by the Commission (one each in India and Tanzania, two in Norway and two in South Africa). All the other locations have at least some structures or regulations which suggest that they should be regarded as tax havens, but they do not necessarily function as tax havens for the funds in which Norfund participates. The table also shows that there are a number of examples of funds located in tax havens although they only have one country as their target zone. For example, of the four funds in the Cayman Islands, one is directed at China, one at Thailand and two at Vietnam, while the three funds in Mauritius are focused on Madagascar, Sri Lanka and Costa Rica respectively. Where these choices of location are concerned, the Commission fails to see the relevance of Norfund’s argument that location in a tax haven contributes to avoiding unnecessary tax payments in third countries. In cases where funds invest in only one country, no third country need be involved. One could have established these funds in the country at which they are directed, and only two countries would then have been involved in the activity – Norway and the country where the funds are located. In its argument for using funds, Norfund has maintained that these are often located close to the investment country and that this gives the managers better local knowledge than if the institution had invested directly. This argument does not ring true for all the above-mentioned funds directed at single countries.

7.4 Assessment of Norfund’s use of tax havens

Chapter 3 reviews typical structures in tax havens. Many countries and tax havens possess a number, but not all, of the distinctive features described in that chapter.

Put briefly, tax havens often fulfil the following. They have a dual tax system which favours foreigners through a virtually zero-tax regime, combined with secrecy and the absence of publicly accessible registries. The foreign companies which take advantage of this tax regime must not conduct local activities nor have local employees other than local representatives at senior executive and boardroom level. These local representatives with executive or director functions are often so few in number and spread over so many different companies that the latter could not be run from the tax havens if their purpose was to provide the owners with the best possible return on capital.

The Commission therefore takes the view that the use of the residency concept – in other words, that the company has its main seat and is domiciled in the tax haven – is often artificial. Such tax havens are made attractive to foreign companies and investors through the combination of affiliation in a tax sense, virtually zero tax and the benefit of tax treaties which reduce the tax burden on investments in third countries.

The tax planning aspect which the use of tax havens involves runs counter to Norfund’s goal of paying full tax on its investments in Africa. The Commission also takes the view that the use of tax havens in general conflicts with the overall goals of Norway’s development and assistance policy, including opposition to corruption and economic crime and contribution to economic development.

The Commission has identified the following possible detrimental effects of Norfund’s use of tax havens:

1. Contributes to the loss of tax revenues by developing countries.

2. Contributes to maintaining tax havens by providing them with income and legitimacy which, in turn, contributes to lower growth in poor countries.

3. Contribute to money laundering and tax evasion.

1. Contributes to the loss of tax revenues by developing countries

A goal for Norfund is to contribute to development in the countries where the institution or the funds in which it participates invest capital. This implies that tax revenues should be secured for the host country.

One question is whether Norfund, given its goal, should focus to a greater extent on investing where the highest pre-tax return can be obtained in the developing country, and ignore opportunities for reducing overall tax on these investments through tax treaties and havens, given that reduced tax in such cases could mean a transfer of income from the relevant developing country to the owners of the investment fund – including Norfund.

Placing assets in tax havens can run counter to the goal of contributing to securing tax revenues for the host country. This is because the tax treaties between the host country and the jurisdictions where the investment funds are registered eliminate or reduce the right of the former to levy tax. This can be illustrated by Mauritius, which has tax treaties with a number of African countries. These reduce the withholding taxes which can be levied by the latter. Such treaties are agreed in part because poor countries lack capital and therefore occupy a weak negotiating position in circumstances where the tax havens can offer capital.

Tax treaties of the kind mentioned above are not unusual, but the Commission would make it clear that they are formulated on the basis of the domiciliary principle – in other words, the country given the right to tax is the one in which the taxpayer is domiciled. In cases involving legal entities that are merely registered in a jurisdiction and that cannot engage in meaningful activity there (confer GBC1 and GBC2 in Mauritius, see below), no justification exists for such tax treaties on legal, economic and fairness grounds. No justification accordingly exists for giving Mauritius the right to tax GBC1s, as the tax treaties do.

Norfund has as one of its goals that tax revenues should accrue to the countries in which it invests. However, the use of a secrecy jurisdiction as an intermediary means, for instance, that some types of capital income are not taxed anywhere. This helps to rob the source country of tax revenues, and the investors rather than the developing country obtain the benefit of the tax saved. The countries which thereby lose tax revenues are those with the greatest need for government income.

2. Contribute to maintaining tax havens by providing them with income and legitimacy

Norfund’s use of tax havens helps to finance the harmful structures in these jurisdictions through the administration and registration fees it pays. It could also be argued that Norfund, as a public Norwegian fund, contributes to legitimising tax-haven activity if it makes use of their services. Norfund thereby contributes to maintaining the harmful impact of tax havens on developing countries.

This effect would be present even if Norfund did not directly contribute, through its use of tax havens, to tax evasion or money laundering. In chapter 5 and in Appendix 1, the Commission has outlined the way in which tax havens provide a sanctuary where the power elites in developing countries can conceal assets. The fact that such hiding places exist makes it attractive for the power elite to demolish the institutions intended to prevent the plundering of community assets. By legitimising tax havens, such mechanisms will persist and thereby weaken the ability of poor countries to achieve growth.

3. Contribute to money laundering and tax evasion

Given Norfund’s mandate to promote growth and development in the countries in which it invests, investment by the institution in funds must be considered unacceptable if such activities pose a significant risk of Norfund contributing to the concealment of illegal money flows or to tax evasion. Generally speaking, investment in funds registered in tax havens will present a threat of this kind because the secrecy rules make it impossible for outsiders to know who the owners are and what is taking place. However, most of the investors in the funds in which Norfund has invested are state-owned or international financial institutions and/or local pension funds required to invest in their own country. The danger that these investment funds will be used to channel illegal money flows is therefore limited. Nevertheless, private investors also participate in these projects and may have a different agenda. The Commission has noted that the EDFI, to which Norfund belongs, recommends that its members make an assessment of private co-investors to assure themselves that the funds are not being exploited for money laundering. Norfund has supported this recommendation.

The funds in which Norfund invests are normally likely to represent a very small proportion of financial activity in the relevant tax havens, and the direct investment effect for the tax haven will also be fairly insignificant. On the other hand, the signal conveyed if Norfund ceases to use tax havens could be a strong one.

7.5 Example of a tax haven – Mauritius

The Commission has wished to describe in relative detail the effects arising from the use of tax havens by Norfund and other investors. Mauritius is clearly the most popular location for funds in which Norfund participates. The Commission has accordingly chosen to look more closely at the structures in this jurisdiction in particular, and the effects of locating funds there. It has no reason to believe that the Mauritian structures are more or less harmful than would normally be the case for tax havens. The Commission’s purpose has been to identify how arrangements in Mauritius function in relation to taxation and to registration of and transparency over ownership and the financial value of various types of assets and activities. The assessment looks only at those structures which are particularly suitable for capital pass-through. It must be emphasised that a number of the arrangements and structures found in Mauritius and discussed below are not necessarily relevant for Norfund as the institution operates today.

During its visit to Mauritius, the Commission held short meetings with a number of institutions and was given access to a number of annual reports prepared by these as well as to relevant legislation. The Mauritian authorities and institutions were most accommodating and open in relation to the Commission’s work.

7.5.1 Company types in Mauritius

Mauritius has special regulations for companies which are going to operate solely in other states – known as “foreign companies” (non-local or non-resident). Both local and foreign companies are covered by the Companies Act – Act No 15 of 2001 – but differences exist in crucial areas of the regulation of these two company types. Foreign companies are given a number of exemptions from obligations which otherwise apply to companies with limited liability.

A foreign company can be registered as a global business company, either 1 (GBC1) or 2 (GBC2). GBCs cannot have employees in Mauritius, and their business must be conducted in foreign currencies. The differences between these two types include a larger number of exemptions for GBC2s than for GBC1s. 2 The funds in which Norfund invests are GBC1s. Both types enjoy a long list of exemptions which distinguish them from local companies. Providing an exhaustive list of the various exemptions given to the two categories would be too inclusive, but examples which apply to both types are listed below:

• Exemption from using the designation “Limited” for companies with limited liability. Abbreviations used in other states can be employed, such as AS, OY, GmbH and so forth. See section 32.

• No obligation to publish any reduction in stated capital. Section 62 (2).

• A subsidiary can own shares in a holding company which owns the subsidiary. Section 83.

• Exemption from restrictions related to loans and other benefits for directors and senior executives. Section 159.

• Exemption from the requirement to have a local senior executive or director in the company who can serve as company secretary. Section 164 (1) a.

• Exemption from the duty of redemption, obligation to indemnify and so forth. Sections 178 and 179.

• Exemption from the requirement to prepare an annual report. Sections 218-222.

• Exemption from the requirement to prepare an annual return. Section 223.

• Exemption from official inspection of the company and corporate documents. Sections 225 and 228.

The following exemptions apply only to GBC2 companies:

• Exemption from paying in share capital (in cash). Section 57.

• Exemption from the requirement to use a local company secretary. Sections 163-167.

• Exemption from accounting obligations, the duty to preserve important corporate documents and the obligation to use an auditor. Sections 193-195 and 210-217. This means that a GBC1 does have an obligation to keep.

• Exemptions from a number of local registration obligations and requirements to provide documents: to use a local agent, to provide key documents (articles of association and so forth), and to submit the names of directors, changes to the articles or to the officers of the company, and possible voluntarily prepared accounts, etc, to the registrar. Section 273.

Broad opportunities are provided to move a company fairly simply into and out of Mauritius. A GBC1 has some obligation to prepare accounts. These must be compiled in accordance with the International Accounting Standards (IAS) as defined in section 2. The Commission has little information about how these accounting requirements are enforced in practice, and what real enforcement opportunities exist. It is also questionable how appropriate they are for enforcement without other provisions. Nor do the accounts have any significant local interest, since GBC1s and GBC2s are by definition unable to pursue local operations (see above) and corporation tax is insignificant. The accounts are only submitted to the Financial Services Commission, and are not accessible to the public (users of the accounts).

Few provisions in the Companies Act are accompanied by any sanctions, particularly for GBC1s and GBC2s. In those cases where a sanction exists, the maximum penalty is low and limited to fines (see sections 329, 330). The exception is cases which fall under section 332 (false statements), where the penalty is five years imprisonment.

In the event of breaches of the accounting legislation, the Commission takes the view that the secrecy rules will also pose a considerable problem. A company’s contractual partners, creditors and so forth basically have no opportunity for insight into the company’s operations. As a result, they will not be in a position to report violations or to demand explanations for uncertainties affecting the accounts.

The tax regulations are of particular significance. Mauritius has a dual tax regime – one for nationals and the other for foreigners. The tax regime for foreigners is substantially more favourable than the one for citizens, with lower tax rates and reduced reporting requirements. Foreigners pay no tax on capital gains, wealth, inheritance or royalties. Nor does Mauritius charge a withholding tax when foreigners transfer income from there to their country of domicile. The regulations described above mean that the type of fund in which Norfund invests in Mauritius has a fairly narrow tax base in that country.

GBC1-type companies have a nominal corporation tax rate of 15 percent, but can credit tax paid abroad against their liability in Mauritius. Even if they cannot produce documentary evidence of tax paid abroad, they receive an automatic discount for such payments which corresponds to 80 percent of the nominal tax rate. This means that the real rate of corporation tax for such companies is three percent. Various facilitators in Mauritius advertise on the internet that exemption from Mauritian tax can be granted on application to the government. GBCs on Mauritius accordingly appear to have a zero-tax regime.

GBC1 companies can take advantage of the tax treaties Mauritius has signed with other countries. Most African countries which tax capital gains, for example, apply a rate in the 30-35 percent range. However, the tax treaties assign the right to tax capital gains to the country in which the investor (company) is domiciled. This means that, if a GBC1-type company realises capital gains in an African country (or in India 3 ), the right to tax is assigned to the country of domicile (Mauritius) and not to the source country. The tax treaties also contribute to reducing withholding taxes on dividends. Nearly all African countries levy such withholding taxes on dividends, with the rates varying between 10 and 20 percent. The tax treaties reduce this type of tax to 0.5 or 10 percent respectively, depending on the country concerned.

Corporation tax for GBC2-type companies is zero, and no other types of taxes are levied either. Such companies cannot take advantage of the Mauritian tax treaties. They have no obligation to produce accounts and do not need to meet requirements for local representation through front persons of any kind. GBC2 companies can be established in the space of 48 hours. The sum total of all the liberal provisions applied to this type of company makes it very difficult, even after a request for access, to obtain any information. Since their investors cannot take advantage of tax treaties, but are covered by secrecy and a zero-tax regime, GBC2-type companies are very suitable hiding places for money and other types of tax evasion.

Protected cell companies (PCCs) . Such companies can divide their assets and liabilities into different cells, each of which has its own name and represents a single asset (or asset class). The total number of cells thereby comprises the whole company. The most important reason for permitting such companies is that they provide very good protection against creditors and third-country governments. Moreover, Mauritius derives an income from the registration of each cell, and requests for access to information from each cell also incurs charges.

PCCs are often used by insurance companies and various types of funds (for pensions or investment, for example). They are covered by the same tax regime as GBC1 companies, and can credit tax paid abroad even if it is hypothetical. A company which invests in a tax-favoured object can, for instance, credit tax paid abroad as if the investment were made in a non-favoured object by calculating what the tax would have been for such an object. Favourable arrangements of this type mean that the tax burden in practice is probably zero for PCCs. Such companies can take advantage of Mauritian tax treaties. No open registry of PCCs exists, and they are thereby also covered by the secrecy regime.

Companies which take advantage of the tax regime for foreigners cannot operate locally, use the local currency or employ locals on any scale other than through nominees. The latter can be appointed as senior executives or directors for hundreds of companies. The Commission has explained in chapter 3 that the number of companies represented by each nominee is so large that, if they actually managed the companies in which they are employed – or participated, for that matter, in any substantial activity at company or board level – the operation of these enterprises would not have been rational in business management terms.

The lack of real activity in these companies makes the use of the domiciliary principle as the basis for the tax treaties extremely dubious. 4 In reality, these are shell companies and funds to which Mauritius offers a location for a nominal fee to the government and for very low taxes protected through tax treaties. This is an example of a harmful structure, whereby Mauritius offers investors the opportunity to establish an additional domicile which allows the investor to exploit what amounts in practice to a virtually zero-tax regime. In reality, the source country is robbed of tax on capital income through this type of structure, while the tax-related outcome for the investor is very favourable.

The differences between GBC1 and GBC2 companies are very important in practice, and they are directed at different target groups. GBC1 is aimed at owners who want to take advantage of the tax treaties with transactions into and out of Mauritius. The requirement is that the company is regarded as resident in Mauritius and can be considered the beneficial owner of the relevant income stream within the provisions of the tax treaty. How far these terms are fulfilled is often uncertain. That rests on the facts in each case, which cannot be established because of the secrecy rules without access to the company’s accounts and other documentation.

The next question is whether the exemptions applied to GBC1 companies are of such a character that it would not be natural to conclude that the company has the necessary local connection, both under the tax rules of other countries and under the tax treaties. Particularly problematic is the concept of special arrangements and exemptions for companies which are only going to operate in other states, which can only be owned by foreigners and which cannot own real property locally. This means that those affected by the company’s operations are exclusively resident in other jurisdictions, without the right to access tax documentation from the company except through a rogatory letter to the courts. It is also uncertain whether any documents of significance for the company are held locally. Taken together, this contributes to giving foreign companies a limited local connection. The Commission would point to this aspect without expressing any further view on the legal and other questions it raises.

In the Commission’s view, the characteristic features of GBC1 and GBC2 companies are not significantly different from company structures in other tax havens.

7.5.2 Trusts

Trusts are regulated by the Trusts Act of 22 May 2001. Trust legislation in Mauritius differs little from the general description of trust law in tax havens provided in chapter 3. The misuse of trusts to conceal that it is, in reality, the beneficiary rather than the trustee(s) – as required by the law – who controls the trust can be difficult to detect. In any event, it is impossible to identify underlying realities if the existence of the trust is unknown to the outside world, and secrecy rules hinder access to information by those who need it. Trusts pay no form of tax in Mauritius, and no obligation exists to register them in any open registry.

7.5.3 Measures against money laundering

The Registrar of Companies has a duty to report to the Financial Services Commission if reasonable grounds exist for believing that the legal requirements of the Companies Act 2001 are not being observed, or if a company is being used as an instrument for illegal trade in narcotics or arms, economic crime or money laundering. This reporting duty also applies if the registrar discovers that an agent of a company is not discharging his or her responsibilities as an administrator of the GBC in a satisfactory manner (see Companies Act 2001, section 345, Part I no 2).

Since GBC2 companies, in particular, do not have obligations to produce accounts or retain documents and so forth, abuse is very unlikely to be detected – particularly when both GBC1 and GBC2 companies are also exempted from inspection under sections 225 and 228.

Companies based in tax havens which have a GBC2 structure could be well suited for laundering funds which relate exclusively to other states and citizens in other states. The 2007 annual report from the Financial Intelligence Unit (FIU) states that about 120 suspicious transaction reports (STRs) were filed in that year. Of these, just under 100 came from banks and a little less than 20 from offshore management companies. The great majority of the reports related to local companies. These are very low figures regardless of the method of assessment. The number of reports must be viewed in relation, for instance, to the fact that assets placed from Mauritius in other countries total more than USD 184 billion. The great bulk of this has passed through from other countries. Viewed in relation to this activity, the number of STRs is low (see box 8.2 on money laundering).

7.5.4 Access to information through rogatory letter

Rogatory letters are handled by the Office of the Solicitor General, which seems to follow up such requests in an acceptable manner. At the moment, the process can take three years if available legal barriers to accessing information are utilised. The goal is said to be to reduce the time taken by the procedure to one year.

7.5.5 Mauritius – principal features of capital movements

According to the figures presented in section 6.2.3, Mauritius does not have especially large direct investments or a particularly big proportion of its labour force employed in the financial sector. The financial sector’s share of GDP is unusually high, to be sure, but figures for this industry in the national accounts must always be treated with caution because of major methodological problems.

Statistics for the balance of payments from the Bank of Mauritius show that its international assets totalled MUR 359 billion as of 31 December 2007, while its liabilities were MUR 291 billion. These figures include direct investments to and from Mauritius, and represent 164 and 133 percent of GDP respectively. The assets and liabilities cannot be described as extraordinarily large in relation to the size of the economy.

The IMF conducts an annual coordinated portfolio investment survey (CPIS) covering a number of countries broken down by debtor nation. Mauritius participated in 2007 along with 76 other countries and jurisdictions. Important countries which did not participate were China and Saudi Arabia. All the other largest economies and international financial centres took part, including the tax havens. According to this survey, portfolio investments in Mauritius as of 31 December 2007 totalled USD 155 billion. This is far above the figure from the Bank of Mauritius, which was just over USD 13 billion at the exchange rate prevailing at 31 December 2007. The difference can probably be explained by the fact that the central bank’s figures do not embrace all the assets in the GBC1 and GBC2 companies mentioned above.

Since GBC1 companies placing assets abroad must use a bank in Mauritius as an intermediary, its assets will be included in the figures for the bank’s assets. This does not apply for a GBC2 company, and the assets of such companies are accordingly excluded from the central bank’s statistics.

In its annual report for fiscal 2006-2007, the Bank of Mauritius refers to the CPIS for 2005. The bank notes that the percentage of response from non-banks and GBCs to the data-gathering process has improved. This explains part of the strong growth in the overall portfolio and the fact that the percentage of the portfolio held by GBCs rose from 98.1 percent in 2004 to 98.5 percent in 2005.

The CPIS otherwise shows that Mauritius has a clear majority of its activities directed at Asia. Almost 72 percent of the Mauritian portfolio is placed in India. Singapore, Hong Kong and China, and South Africa occupy the next places (with two-six percent respectively) in the list of the largest investment recipients.

The IMF also presents estimates for capital inflows to different nations and jurisdictions, broken down by country. This division is based on registrations in the creditor country. It is striking that Mauritius has total identifiable claims of only USD 6 billion. Since the central bank has reported that more than 98 percent of the portfolio is linked to GBCs, the ownership of this portfolio should either have emerged in the CPIS (assuming that the portfolio was financed by loans) or in the stock of inward direct investments to Mauritius. However, this is not the case. According to UNCTAD, the stock of direct investments to Mauritius was about USD 1.3 billion as of 31 December 2007. It is thereby unclear how the extensive assets placed from Mauritius are financed.

According to UNCTAD, direct investments made from Mauritius in other countries totalled USD 0.3 billion as of 31 December 2007. However, India’s balance of payments showed that the flow of direct investment from Mauritius to India amounted to just over USD 11 billion during 2007 alone. 5 The Indian data show that net direct investment from Mauritius totalled USD 29 billion in the 1991-2007 period. This figure accords poorly with the UNCTAD statistics for direct Mauritian investment. The explanation could be that UNCTAD’s figures do not include investment by the GBCs, and that the great bulk of investment from Mauritius to India is pure pass-through from third countries. Mauritian regulations prohibit round-tripping with India (Indian assets placed in Mauritius and then returned to India).

The methods used for the CPIS and direct investment statistics mean that no overlap should exist between the two statistics with regard to which positions and assets they include. One may thus add the Indian figure for direct investment from Mauritius to the overall Mauritian portfolio of investments as recorded in CPIS, making the total portfolio USD 184 billion. In addition, there are direct investments in other countries, but we have no figures for these.

Statistics from Mauritius provide no data concerning the return on investment by the GBCs. If these are assumed to yield an annual return of 10 percent, the figure should be USD 18 billion in 2007-08. The Mauritian GDP for 2007 was just under USD 7 billion.

The data presented here show that the role played by Mauritius as a pass-through country for capital is very extensive, particularly by comparison to the size of its economy. The tax regulations in Mauritius mean that this pass-through generates little tax revenue for the country. Data presented in section 6.2.4 indicate that this activity contributes to a relatively extensive financial sector, but the Mauritian economy is primarily based on other activities. It is striking that the bulk of the financing of the pass-through business in Mauritius does not appear to be recorded in the statistics of other countries.